Liquid Insight: Getting to even

It is expected that, the July FOMC statement to be very similar to Fed Chair Janet Yellen's most recent speeches: cautiously optimistic, but noncommittal on the timing of liftoff. The Fed is very unlikely to hike in July, but September should very much remain a "live" meeting. Markets are currently pricing in the vicinity of a 50% probability that liftoff will happen by September. A recent Bloomberg poll found business economists placing even odds on September as well. These probabilities likely largely mirror Fed officials own uncertainty about when to start normalizing rates. As a result, any sort of explicit signal about future Fed policy at the July meeting is not expected. Forecasts see a close call between September and December for liftoff, with a slight nod given to September as one should expect the data to be good enough to start hiking then.

Some may ask: won't the Fed want to see markets much closer to fully pricing in a rate hike when liftoff occurs? And won't the Fed be concerned that such vague communication could cause another market "tantrum"? The answer to both questions is "no." The FOMC should be comfortable hiking with market expectations around current levels, given their emphasis on the gradual pace of the entire hiking cycle. Although the FOMC does want to minimize the risks of a sharp market selloff upon liftoff, they will not be constrained by market pricing if the data suggest it is time to begin policy normalization. And while there is still time for the Fed to influence market pricing,

"We also expect post-meeting speeches to emphasize the progress toward the dual mandate objectives rather than offer a more overt signal of policy intentions, in line with the focus on data dependence", says BofA Merrill Lynch.